In a State Revolving Fund (“SRF”) program bonds are issued through an associated SRF issuer. FIG. 1 shows the structure of a conventional SRF program. As seen in this Fig., the bond proceeds are used to make loans to borrowers. Bond debt is serviced by: a) loan repayments from the borrowers; b) net interest subsidy (or “additional subsidy”) from an interest subsidy fund (which may be in the form of “contract assistance” from one or more State General Obligation bonds or appropriations); and c) interest earnings from a reserve fund. The reserve fund is funded by equity from the SFR fund and the equity is returned to the SRF fund as principal is retired.
While conventional SRF programs using the reserve fund model typically achieve high ratings (e.g., “AAA”), such SRF programs are generally required (e.g., under Federal law) to restrict the yield on program equity in the reserve fund to the bond yield. This is due to the fact that the earnings on the reserve fund are used to pay debt service and that the reserve fund is pledged as security for the payment of the debt service. In other words, SRF program equity in the reserve fund is both a pledged fund and a sinking fund and as such the earnings on the reserve fund must generally be restricted to the arbitrage yield of the bonds which they secure. Of note, in order to maintain the tax exempt status of bonds issued under such a conventional SRF program, any yield on program equity in the reserve fund greater than the bond yield must be turned over to the Federal government. Conventional SRF programs using the cash flow model typically invest their program equity directly in loans, that has a similar economic effect to borrowing to fund those same loans and investing the equity at the bond yield.
Among those benefits and improvements that have been disclosed, other objects and advantages of this invention will become apparent from the following description taken in conjunction with the accompanying figures. The figures constitute a part of this specification and include exemplary embodiments of the instant invention and illustrate various objects and features thereof.